I’ll say it again. Let’s get clear about something: Your service business is not different; your market is not different.
I hope, after you read my column in PM’s July issue, you can see this is true. A great business needs processes, both internal and external. If you don’t have the right processes implemented, your company is not different, your company is broken. Fix it.
The good news is I heard a few “pop” sounds after you read my July column. If you recall, I asked you to pull your head out of wherever you had it stuck!
As long as you know how to create your company’s selling price for your services, the following becomes your and every service contractor’s focus. In July, I left you with the first three of five main areas to focus your attention in your business:
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The phone call from a prospective customer;
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The conversion from prospective customer to buyer; and
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The maximizing of the buyer to buy more of your services.
The previous focus points will drive your sales. When you are clicking on all cylinders, you will drive in revenue, and the last thing you want to do is lose it!
This month I will cover main areas four and five: direct cost management and overhead cost management, as promised in my last column (“Top service business priorities,” July, page 55). Go read it now, if you haven’t already, before continuing to read this one.
Focus points four and five will help you manage your costs to keep a lion’s share of profit, day after day, month after month, year after year. Do this, and you will have created your own money machine. They are:
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The management of your direct cost (material product and labor service); and
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The management of your overhead cost.
These two focus points make up what is commonly called “the Big Five.” I’ve split them up for a good reason. Focus point four represents your key direct cost, while focus point five represents your key overhead cost.
Your direct cost is just that. These costs are directly related to the sale:
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Material/equipment cost; and
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Labor cost.
Don’t go focusing on the pennies here; stay focused on these two direct costs.
For your plumbing service company, you should strive to reach a 66% gross profit. To reach this target, your material will come in about 10% of sales, and your labor (fully burdened) will come in about 24% of sales. If your company does remodeling, installations, etc., your targets will be different.
Breaking it down
If you structure your operations profit-and-loss statements correctly, they will include:
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Gross sales;
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Reduction of sales;
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Net sales;
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Direct cost;
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Gross profit;
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Overhead (fixed and variable); and
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Net operating profit.
When you subtract your direct labor and material cost, you should end up with close to 66% gross profit.
The fourth and fifth focal points get you out of the starting blocks. If you stumble to achieve this gross profit target, reaching your targeted net profit will most likely be lost.
Managing your technicians’ efficiency on the job is your responsibility. You can do this by making sure their trucks are fully stocked, thus eliminating wasted time running down parts to complete a job, or by tracking your techs’ on-the-job time to the hours sold. If your tech is taking longer to make a repair or replacement than your flat-rate book states, either your book is wrong, your tech likes to chat with the customer or your tech needs more technical training to become more efficient.
The bottom line is, track your technicians’ performance. Our Nexstar members use a coaching and tracking manager to help the managers keep their eye on this ball.
Material is the other direct cost for you to manage. Create a priced purchase order with every vendor material order. You’d be surprised: What you think you should be paying isn’t what you might be paying. A purchase order system in place will help you manage this direct cost and protect your gross margin. Never, never, ever give out a blank purchase order. You might as well just hand out a signed blank check. Always have your purchased orders priced, and match each of these purchase orders up with the vendor invoice for accuracy.
Keep your eye on these direct-cost line items and you are two-fifths the way to being a rock star.
Don’t pop the champagne bottle yet — you still have three-fifths, or the fifth focus point to conquer.
The last three items are in your overhead expense as a percentage of sales are:
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Salaries* less than 15%
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Marketing less than 10%
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Vehicles less than 5%
Master managing these three items and you can scale your business to as high as you would like to go. However, that’s easier said than done.
As your company grows, you will hire staff to help you manage the processes in your business. The processes will be “hats” your employees will wear: customer service representative, dispatcher, trainer, manager, fleet, warehouse, AR, AP, payroll, HR, IT, marketing and runner, just to name a few.
Nexstar created a staffing model that will laser target your needs for personnel in your business. It’s a life-changing tool for any business owner.
Not only will you need to manage this overhead cost, you will need to learn how to manage these people! Managing the cost is one thing, albeit a large responsibility in becoming profitable; managing people is a whole other skill set linked to managing the cost as well.
Marketing is the riskiest piece to this entire puzzle. Why? No surefire marketing tactic works 100% of the time. Marketing is a full-time gig on its own. Personally, I hired out my entire marketing department. I found the best marketing people and said, here’s your budget, these are my targets, go hit them. Then I stepped out of the way. You may feel different about marketing; you may be the person I wished I could hire for marketing. If that is you, then go for it. But if it’s not, hire it out! It’s OK not to have your hands in everything. Manage this cost to less than 10% of your total sales. If you spend more than 10% of sales, just know you are throwing profit dollars away. That’s a fact!
The last piece to your success is managing your vehicle expenses. Keep your vehicle expense less than 5%. This includes fuel, repairs, lease payments or interest on loans along with depreciation.
When you add up: Labor 24% + Materials 10% + Salaries 15% + Marketing 10% + Vehicles 5% = 64% of your sales are wrapped up in these five items. In order to make 25% net profits, you can have only 11% more to spend.
Focus on the cost management, steps four and five, along with steps one through three laid out for you in July’s issue of PM, and you will become a rock star! And if you already are a rock star, send me your P&L for review.
